Energy Legal Blog

All Users of PJM Transmission Grid Should Pay the Same Per-Unit Rate, FERC Judge Rules

A FERC judge has ruled that the PJM Interconnection should phase out its nearly decade-old practice of setting transmission rates on a license-plate basis — each transmission customer paying a rate that recovers the embedded transmission investment in the zone where it takes delivery of power.  Instead, PJM should phase in transmission rates that charge all customers for use of existing transmission system the same per-unit rate set on a so-called postage-stamp basis because the cost to all is the same (just as a stamp costs the same whether a letter travels across town or across the country).  If FERC affirms the judge, the postage-stamp phase-in will begin retroactively as of April 1, 2006. 

Applying reasoning that should be equally applicable to all regionally operated transmission organizations like PJM, the judge explained that the high-voltage transmission system in such an organization constitutes an integrated network that is equally beneficial to all users who, for that reason, should pay the same per-unit rate.  In contrast, continued use of a license-plate rate in such a network gives a “free ride” to customers who take delivery in an area of low or under investment in the network while overcharging customers located in areas of high or adequate investment.  As a case in point the judge pointed to recent PJM addition AEP whose customers disproportionately have shouldered the cost of AEP’s investments in relatively higher-voltage existing facilities that benefit equally all shippers on the PJM grid.  To prevent “rate shock” to customers currently paying low license-plate rates, the phase-in limits transmission rate increases to 10 percent per year with any costs trapped during the transition deferred for recovery in later years.

Going-forward charges for investments in new transmission facilities will continue unchanged and be allocated directly to the customers for whose benefit the investments are made.  Generally, that means investments associated with new interconnections or services are charged to the interconnecting system or recipient of the new service, while network upgrades will be charged to all users on a postage-stamp basis.

In embracing postage-stamp rates for transmission, which had been championed by FERC’s staff, the judge rejected competing proposals that compared high-voltage  transmission to the interstate highway system, divided into higher-voltage “highways” investment in which would be charged equally to all PJM customer on a postage-stamp basis and into lower-voltage “byways” that would be paid for locally on a license-plate basis.  He also rejected the demands of PJM’s legacy transmission owning utilities and some consumer advocates who sought to perpetuate license-plate rates on the ground that investments in transmission were originally made to provide only local service.  That original purpose is no longer germane, having evolved into an integrated network “where no participant can obtain the benefits of being a part of a wide-scale electricity market without the other participants . . . .”  Although well-reasoned, the judge’s decision is likely to be challenge on appeal to the Commission.